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G.E. waits for Washington to drop the ball

July 28, 2009

Gridlock in Washington is not always welcome, but General Electric appears to have placed much of its hopes for GE Capital on it.

The fear hovering over GE Capital has been that Obama’s proposed financial overhaul, as outlined in the June white paper, would mean that the company will be forced over five years to spin off its giant finance arm, resulting in higher taxes and increased costs. During an investor conference webcast today, GE Capital went into great detail to address concerns about losses and capital needs, but offered little more than wishful thinking when it came to the regulatory outlook.

According to GE capital’s chief executive, Mike Neal, a required breakup is looking “increasingly unlikely,” as the slow process of legislative and regulatory horse-trading gets under way in Washington. At the very least, GE Capital’s status could be grandfathered in any new regulatory regime

The argument why GE Capital is not politically vulnerable looks thin.

“We’re consistently hearing from people that we shouldn’t be breaking up successful institutions when they weren’t the cause of the crisis,” G.E.’s general counsel, Brackett Denniston said today, noting that he had visited Washington as recently as Monday.

Of course, “successful” companies do not ordinarily go to the federal government’s well as often as G.E. has. The company has issued some $51 billion of debt that is backed by the Federal Deposit Insurance Corp. That is more than any bank. The government also backed $17 billion of commercial paper before G.E. announced last week it was withdrawing from that part of the program.

And whether or not GE Capital had anything to do with starting the last crisis is besides the point as Washington works at preventing the next financial crisis. It will be difficult for lawmakers to overlook doing something about a financial colossus, with more than $650 billion in assets, nesting inside an industrial parent. The fact that GE Capital’s primary regulator, the Office of Thrift Supervision, is disappearing under the Obama plan provides another incentive to force change.

G.E.’s best hope is that fighting over health care and other administration proposals will sap Washington’s will for a comprehensive financial overhaul that includes GE Capital.

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